How Kellwood Revamped its

By Larry Dignan  |  Posted 2003-07-01 Print this article Print

Deals with computing service providers are still murky. The best negotiators are insisting on performance goals.


Kellwood's Riley revamped his deal with EDS to install more objective metrics to measure performance. He also assigned more staff to manage the contract, with a core group of 15 people. In the first deal with EDS, signed in 1996, the services company filled every tech role for Kellwood. When a Kellwood manager had a technology issue, he dealt with EDS, not a colleague. "We had to own that relationship," says Riley.

The first deal was effective, but its primary focus was to integrate 12 individual units with different systems. Once Kellwood unified systems on an internally developed Division Operating System and a heavily customized application from Jesta, a Canadian software company, EDS became more of a service provider. The catch: Kellwood didn't have measurements to gauge service levels.

Proper metrics are often lacking in older outsourcing deals. Dashboards dishing data on network capacity and server utilization barely existed four years ago, says Barnard, who's negotiated about a dozen outsourcing contracts.

After hiring Gartner to do a benchmark study, Riley broke up the contract into buckets such as network management, application development, enterprise systems and desktop support. That's a technique used by Procter & Gamble, which last year decided outsourcing its infrastructure to one company was too risky. Instead, it divided its outsourcing plans into parts, including infrastructure and business processes such as human resources and financial management. HP won an infrastructure part and P&G will farm out business processes in upcoming months, says Benton.

At Kellwood, each outsourced part of the business has performance goals. For example, EDS had to meet specific uptime requirements for enterprise systems and network management. Systems had to be up 99% of the time. If a key system was down, EDS had two hours to get it back up and running. If not, EDS would have a percentage of revenue at risk. If the performance level continued, those penalties would compound by each month. If poor performance is resolved, EDS has the chance to win back half of the lost revenue. Performance is monitored monthly.

Kellwood's new deal with EDS costs roughly 10% less than before, including the cost of bringing some functions back in-house. Riley would not divulge an average cost figure since a "significant part" of EDS' revenue is tied to usage and performance goals. A percentage of EDS' revenue is at risk if it fails to meet performance goals, but it's less than half. Riley advises companies to put enough of the deal's revenue at risk to ensure quality service, but not so much that a vendor doesn't have incentive to improve.

There's also a side benefit to the restructured EDS deal—leverage. By putting his infrastructure into categories, it's easier for Riley to outsource each part with a different vendor and possibly bring application development in house. Many of his regional CIOs are former EDS employees with intimate knowledge of Kellwood's systems.

And what if EDS balked at the new deal? "I would've walked," says Riley. "I would've done whatever it took to get the deal structured this way."

What You Should Do: When Entering An Outsourcing Contract

Tell the vendor exactly what is expected and include guidelines to measure performance.

Analysts say there is a transition phase of at least six months before service improves.

Companies can't merely hand off infrastructure. Provide resources to manage the deal.

Human resources should be involved as people are transferred to the outsourcing vendor.

Business Editor
Larry formerly served as the East Coast news editor and Finance Editor at CNET News.com. Prior to that, he was editor of Ziff Davis Inter@ctive Investor, which was, according to Barron's, a Top-10 financial site in the late 1990s. Larry has covered the technology and financial services industry since 1995, publishing articles in WallStreetWeek.com, Inter@ctive Week, The New York Times, and Financial Planning magazine. He's a graduate of the Columbia School of Journalism.

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